Good Financial Reads: Interest In Housing

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Interest In Housing

By: Gordon Stockman, Efficient Wealth Management

“First off, let’s get it out of the way, I have no idea whether prices are headed up or down in the short term or long term.  These prices are driven by three basic things: low interest rates, supply, and greed.   Demand is a fourth, but demand is steady and present thus somewhat normal.  Sure, overseas demand is contributing but outsiders are certainly not alone in paying these very high prices.  The last 18 months have mostly been a story of conflict between supply and greed.  This current game is being played out on top of the foundation of overall low interest rates.”

“Economic theory tells us that a shortage of supply will cause prices to rise; then trigger an excess supply which will result in normalizing prices again.  So why has that not worked yet?  Prices just keep rising faster and faster.   Well the answer must be in the supply.”

“Low rates make money cheap with interest as its inherent cost. As a result, the low interest rates allow ALL asset prices to rise. It is not just housing, though it may feel that way because of the supply versus greed struggle.Stocks are expensive, bonds are very expensive, businesses to buy are expensive and in fact almost anything you want to buy has been made easier by cheap money.  So whether it be houses, stocks, cars or washing machines it is easier to buy them even at higher prices.”

“So do not let the conversations about high housing prices steer your focus away.   Pay attention to interest rates and where they may or may not go.  They are the entire story currently.  Housing prices are a symptom not the disease. ”

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